Economic Analysis of Agency Law – Episode 2: How to Bond an Agent

Welcome back to our series on economic analysis of agency law. In this episode, Professor Seth C. Oranburg tackles one of the core challenges in agency relationships: what to do when agents don’t perform as expected. Whether it’s a contractor who overstays their welcome or an employee missing critical deadlines, principals must find effective ways to ensure that delegated tasks are completed in their best interest.

Drawing on real-world analogies—from the classic case of a kitchen remodel gone awry to humorous insights inspired by a mayor’s overzealous supervision—Professor Oranburg explains the three key tools principals use to reduce agency costs: monitoring, bonding, and disciplining. He explores how monitoring (using performance reviews, project management tools, and time-tracking systems) helps keep agents accountable, while bonding (through incentives like performance-based compensation) aligns the agent’s interests with those of the principal. He also discusses disciplining as a reactive measure to enforce accountability when expectations aren’t met.

This episode not only highlights the benefits of each approach but also addresses their inherent drawbacks—such as the high costs of monitoring, the risk of incentive gaming through bonding, and the potential downsides of punitive disciplining. By examining these trade-offs, Professor Oranburg equips you with the economic insights necessary to balance efficiency and oversight in agency relationships.

Tune in to discover how these tools work together to bridge the gap between delegation and trust, and learn why even the best strategies require careful implementation. Next, we’ll continue our journey by diving deeper into the concept of authority in agency law.